The U.S. Department of Labor’s Final Overtime Pay Rule Takes Effect on December 1, 2016: Will your organization be ready?

The U.S. Department of Labor (“DOL”) announced its final overtime pay rule under the federal Fair Labor Standards Act (FLSA), which will take effect on December 1, 2016.

Here are the key provisions that covered employers need to be aware of:

1. The Final Rule updates the salary threshold for determining whether an employee is exempt from the FLSA’s overtime pay requirements under the executive, administrative or professional “white collar” exemptions to: $913 per week, or $47,476 annually (note that the salary level test does not apply to teachers, doctors and lawyers). The prior salary threshold was $455 per week ($23,600, annualized).

2. Employers may use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% percent of the new standard salary level, if those payments are made on a quarterly or more frequent basis. (Remember that, even if an employee’s salary exceeds the salary threshold, he/she must still meet a “primary duties” test to fit within one or more of the “white collar” exemptions from the FLSA’s overtime pay requirement).

3.  The total annual compensation requirement for workers classified as exempt under the “highly compensated employee (HCE)” exemption is now $134,004, up from $100,000. Those employees must still be paid on a salary or fee basis of at least $913/week, and nondiscretionary bonuses may not be used towards reaching the salary threshold.

4. The above salary thresholds in item #1 and #2 will be automatically updated every three years, beginning on January 1, 2020.
What Should Employers Do Now?

Employers should take steps to ensure compliance with the Final Rule by the December 1st deadline. In discussions with their employment counsel (to preserve an attorney-client privilege), employers would be well-advised to:

1. Conduct a self-audit of all worker classifications, those above and below the new salary threshold of $913/week.  Determine whether the positions associated with salaries below $913/week will need to be reclassified as non-exempt or salaries will need to be increased to maintain the exemption, and whether those earning a salary of $913/week or more still qualify as exempt from the FLSA’s overtime pay requirements based on the “primary duties” test.

2. Review salaries of workers classified as “exempt” under a “highly compensated employee” exemption to ensure that those positions still qualify for that exemption (i.e., they are earning annual compensation of $134,004 which includes at least $913/week on a salary or fee basis; their primary duty includes performing office or non-manual work; and they customarily and regularly perform at least one of the exempt duties of the “white collar” administrative, executive or professional exemptions).

3. Determine the financial and budgetary impact of converting those “exempt” employees to non-exempt status. Will the organization need to staff differently, hire more people working fewer hours, reassign duties from newly reclassified nonexempt employees to exempt employees to avoid overtime, issue or re-issue policies addressing off-the-clock work to ensure that converted workers are no longer working before and after scheduled hours, train managers on the new rules, and/or make other staffing adjustments? If you decide to increase salaries to the new salary threshold of $913/week, will there be wage compression on those who will now be earning just slightly more than the new salary threshold, requiring upwards movement of those salaries? What will be the financial impact of such a ripple effect?

4. Review and update job descriptions of all positions to ensure they accurately reflect worker classifications of “exempt.” Although the DOL decided not to make changes to the standard duties tests, employers would be well-advised to pay particular attention to the job duties of workers classified as “managers” and “assistant managers” because much litigation has been brought by workers with those titles, claiming that they were actually performing non-exempt duties, notwithstanding their lofty titles.

5. Ensure proper time records are maintained for all non-exempt staff (including newly converted to non-exempt) as failure to do so is an independent FLSA violation.

6. Consider how to communicate these changes effectively to mitigate the impact on employee morale as employees previously classified as exempt may view a reclassification to non-exempt status as a demotion.

Finally, note that even if an employer or its employees are not covered by the FLSA, employers must be compliant with their own States’ wage and hour laws. States may have more employee-protective wage and hour laws than the federal law.

Employers can learn more at the U.S. Department of Labor’s website regarding the final rule:

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